Pharmaceutical and Life Sciences Companies Face Rising Tax Rates, Says PricewaterhouseCoopers
Tax Issues to Play Bigger Role in Company Valuations and Business Strategy
NEW YORK, Dec. 1 /PRNewswire/ -- The global financial crisis,
government pressure, changing market dynamics for an industry
experiencing significant change, and rapidly evolving healthcare
reforms are likely to drive up the effective tax rate for the
pharmaceutical and life sciences industry, according to a report
released today by PricewaterhouseCoopers entitled Pharma 2020:
Taxing times ahead - Which path will you take? The industry's
response to these trends, including diminishing reliance on the
'blockbuster drug model,' will make tax planning more complicated
and challenging for tax executives working for pharmaceutical and
life sciences companies.
In a poll of 35 senior tax executives from pharmaceutical,
biotech and medical device companies conducted last month by
-- Six in ten tax leaders (62 percent of those polled) agreed that an increase in the effective tax rate for the pharmaceutical and life sciences industry is inevitable. -- Sixty-three percent of the poll participants agreed that the cost of increased taxes on their organizations might eventually be passed to consumers unless they find ways to operate more efficiently and transform their approach to R&D and sales & marketing. -- Sixty-two percent of tax executives polled said they are looking to maximize tax credits and other incentives for research and development. -- Virtually all executives polled (100 percent) said they believe that the demand for tax specialists will grow substantially as tax issues for the industry become more complex. -- More than half of the respondents said they are now being consulted early on by senior management in strategic business decisions, and thus have influence over the direction of the company. Still, 34 percent said they are consulted late in the game, and 9 percent of tax leaders said they are informed after the fact about strategic business decisions that have tax implications for the organization.
"To continue to deliver value to shareholders and society,
pharmaceutical and life sciences companies must make strategic
decisions about how they will drive innovation and profitability,
but as they do so, each company's top tax executive needs a
prominent 'seat at the C suite table,'" said Michael Swanick,
global pharmaceutical and life sciences tax leader,
PricewaterhouseCoopers. "Tax planning will be a critical
consideration, not an afterthought, of long-term business plans to
grow, buy, merge or sell and it will be one of the most important
considerations in deciding where to locate IP, manufacturing and
Pharma 2020: Taxing times ahead - Which path will you take? is
the fifth paper in the PricewaterhouseCoopers' Pharma 2020 series
examining key forces reshaping the pharmaceutical marketplace.
Focusing on the challenges and opportunities ahead from a tax
perspective, the report identifies the following market forces
making tax issues more complex.
Economic and Government Pressure: Crackdown on Tax Havens
The global recession has made tax authorities around the world
hungry for new revenue sources to overcome growing budget deficits
and potential new costs associated with healthcare reform
initiatives. Governments are very concerned and are therefore
focused on the use of "tax havens" that allow multinationals to
move profits offshore. Governments will continue to scrutinize
transfer pricing practices to limit abuse of intra-company
transfers of expenses or profits. Economic substance of offshore
operations will become increasingly more important.
According to PricewaterhouseCoopers, identification of
uncooperative nations may become more common, and corporations that
continue to use "tax havens" could face financial penalties and
Healthcare Market Trends: Focus on Outcomes and Personalized
Payers want better value for the money they spend on healthcare
and are focusing their efforts on increasing delivery of successful
treatments. In response, drug and device makers will begin shifting
from a purely product-centric focus to a service model aimed at
improved patient outcomes and prevention or cure, versus ongoing
treatment, of disease. As such, with other participants they are
packaging traditional products with holistic services including
diagnostic, wellness and compliance monitoring. In addition, with
the advancement of personalized medicine and tailored approaches to
prevention and care, pharmaceutical companies are developing more
complex and fragile specialized therapies, many of which need to be
manufactured in closer proximity to patients.
By increasing service delivery and locating manufacturing closer
to patients, or the end market, both the supply chain and
intellectual property will be geographically dispersed.
Pharmaceutical and life sciences companies not only could face new
and higher taxes as a service provider, but they will have less
ability to allocate profits to lower-tax rate locations.
Furthermore, a decision to locate service providers in end markets
could create permanent establishments in multiple tax
jurisdictions, increasing the risk of double taxation disputes
involving international or intra-company allocations around
pricing, royalty rates, interest, management fees, business expense
and gross revenue.
Complex Business Combinations
The need to fill the shrinking drug pipeline has fuelled a
resurgence in mergers and acquisitions (M&A), in-licensing
arrangements and formation of partnerships and joint ventures, a
trend PricewaterhouseCoopers expects to continue. Each of these
strategies comes with significant tax implications, depending on
how a company accounts for acquisition-related items, structures
royalty payments, and shares profits and losses among different
legal entities and locations.
Competition to Attract Pharmaceutical and Life Science
Pharmaceutical and life sciences companies are interested in
locating intellectual property development in areas that offer
economic and tax incentives and to expand their presence in
emerging markets that promise growth potential. International
competition is intensifying to attract new investment by
pharmaceutical and life sciences companies, particularly from
emerging markets, such as China. According to
PricewaterhouseCoopers, this trend may further drive profit growth
to the East, but companies will need to balance increased income
with higher tax rates and potential price controls.
"To manage effective tax rates, pharmaceutical and life sciences
companies will need to develop tax planning consistent with their
new business models and carefully balance risk with opportunity,"
said Simon Friend, global pharmaceutical and life sciences leader
at PricewaterhouseCoopers. "Tax will need to be involved sooner and
up front, a trend we already are seeing throughout the
In Pharma 2020: Taxing times ahead - Which path will you take?
PricewaterhouseCoopers outlines approaches that companies are
taking to respond to tax challenges and related implications for
their organizations. A full copy of the report is available at
www.pwc.com/pharma2020tax. The entire Pharma 2020 series can be
found at www.pwc.com/pharma2020.
About PricewaterhouseCoopers Pharmaceutical and Life Sciences
PricewaterhouseCoopers Pharmaceutical and Life Sciences Industry
Group (www.pwc.com/pharma) provides clients with audit, tax and
advisory services. The firm has extensive experience in delivering
industry-tailored solutions on a wide range of strategic, financial
and operational issues. The Pharmaceutical and Life Sciences
Industry Group is part of PricewaterhouseCoopers' larger initiative
for the health-related industries that brings together expertise
and allows collaboration across all sectors in the health
About PricewaterhouseCoopers LLP
PricewaterhouseCoopers (www.pwc.com) provides industry-focused
assurance, tax and advisory services to build public trust and
enhance value for our clients and their stakeholders. More than
163,000 people in 151 countries across our network share their
thinking, experience and solutions to develop fresh perspectives
and practical advice.
"PricewaterhouseCoopers" refers to the network of member firms
of PricewaterhouseCoopers International Limited, each of which is a
separate and independent legal entity.
© 2009 PricewaterhouseCoopers LLP, all rights
Web Site: http://www.www.pwc.com/
Posted: December 2009
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